Beijing is hoping shale gas can transform the country in thesame way as the U.S. boom, though to date there has been littlecommercial production and a target of producing 6.5 billioncubic metres of gas by 2015 in the world's biggest energyconsumer looks out of reach, according to industry experts.

The lack of experience exploiting shale among new firmsscrambling to enter the sector will make it an even biggerchallenge to get at the gas, and if they fail to deliver Chinawill struggle to reduce its dependence on expensive imports ofoil, liquefied natural gas and coal.

The auction winners will have to buy in the expertise theylack, offering the prospect of lucrative contracts forspecialist foreign firms such as Schlumberger orHalliburton for the "fracking" (hydraulic fracturing)technology to get at the gas.

The first shale auction two years ago was dominated by bigChinese state energy firms such as CNOOC Ltd andPetroChina .

The second auction attracted interest from more than 100firms, an eclectic group that included a real estate developer,a grain trader and a tobacco dealer, lured by gas subsidies andaided by easy access to funds.

The profile of the bidders reflected both the fever pitchover shale and its potential and the government's attempt toreplicate the conditions that underpinned the U.S. shalerevolution: competition among a myriad of independent drillers.

"They will have received very little data about the blocks,will have very little idea about what it is going to cost themto do exploration wells and no idea about development costs,"said Tony Regan of Tri-Zen Consultancy in Singapore, whichadvises gas companies doing business in China.

"They are driven by the attraction of getting in early intowhat could be a huge market."

DEEPER, MORE SCATTERED

China's potential is clear. The government puts technicallyrecoverable shale gas reserves at 25 trillion cubic metres,while the U.S. Energy Information Agency has them at 36.1 tcm,in both cases larger than U.S. reserves estimated at 24.4 tcm.

But China's shale deposits are mostly found deeperunderground than in the U.S. and reserves are more scattered,making it difficult to adapt the technology that has worked inthe United States to China's geology.

Big oil firms including PetroChina and Sinopec Corp working on what are considered some of the bestprospects are making slow progress. They had drilled more than60 shale wells by May 2012, mostly in the southwest Sichuanbasin, but PetroChina had produced only just over 11 millioncubic metres in its most promising area by November.

U.S. shale production in 2011 rose to 240 billion cubicmetres, nearly 30 percent of total U.S. gas output.

The task for the winning companies in the second auctions ismade more difficult by the lack of potential in the acreage thatwas on offer, said a government oil and gas expert with directknowledge of the auction. The 20 blocks were in 8 provincesincluding Sichuan, Quizhou, Henan, Hubei and Jiangxi.

"Based on the understanding of the reserve potential ofthese blocks, I am not optimistic," the expert said. "Very fewwould yield sizeable finds and even if they strike gas, it couldhardly be profitable due to the high exploration cost."

The cost to drill a single shale gas well in China rangesfrom $5 million to $12 million - compared to the average costper well of $2.7-$3.7 million in the United States, according toa report by law firm Norton Rose.

Shortages of water for fracking in gas basins in China wherethe shale is located also present formidable challenges. A U.S.shale well typically requires 8-10 million gallons of water. InChina, that rises to 10-13 million gallons because of thegeology, analysts say.

GUNG-HO ABOUT PROSPECTS

Among the 16 winning firms the government announced inJanuary, six are state-run and mostly affiliated to big utilityand coal firms - including Huadian Group, Shenhua Coal Group andChina Coal Group. Eight are energy investment firms freshlyformed under the auspice of local governments.

Two are little known private firms, including Huaying ShanxiEnergy Investment Co Ltd, owned by Shanghai-listed coal minerWintime Energy, which has pledged to spend 437million yuan ($70 million) on a 1,030 sq-km block insouthwestern Guizhou province, according to Xinhua.

Lured by hopes of a gas bonanza, the prospectors pledged inthe auction to spend at least $2 billion over the next threeyears to shore up production.